Give your finances a spring clean: A guide to tidying up all the mess

SAVINGS
Tom Stevenson, investment director, Fidelity

WITH a new tax year approaching, the sun shining and a string of bank holidays ahead, spring is certainly in the air. Now is the perfect time for you to take control of your savings.

The first step of any spring clean should be ensuring that your money is working as hard as possible. Recent research by Fidelity has shown that while 75 per cent of people have an Isa the majority of them are cash Isas. Over the last ten years a typical cash account, into which £50 has been invested every month, attracted interest of £249. Yet the same level of investment into the FTSE All Share would have grown by £2,359.

Springtime brings a sense of energy. Use this enthusiasm to review previous years’ Isas. Are your investment decisions from five years ago still relevant to your needs today? Think about switching into investments that are better suited to your needs. A lot has happened over the past five years, so other investments may be positioned more favourably for the current environment.

Although springtime and the end of the tax year is a traditional time to think about finances, don’t feel compelled to make decisions now. Use a cash park facility to bank your Isa allowance and make the investment decision when you are ready. Even better, use a monthly savings plan to phase your investments so that you aren’t tempted to time the market – something that most investors find extremely difficult to do successfully.

TAX
Ronnie Ludwig, partner, Saffery Champness

USE your allowances. Don’t let capital gains tax (CGT) rates put you off investing in certain things. It is still beneficial to invest in assets that produce capital growth rather than income, as your gains will be taxed at 18 per cent or 28 per cent when the asset is sold, rather than at 40 per cent or 50 per cent.

CGT also offers the benefit of a higher annual allowance than income tax, which is set at £10,600 for 2011/12. You should normally aim to use your CGT allowance by making disposals before 6 April, so assess your capital generating assets and decide whether or not a disposal before then would be advantageous – this allowance cannot be carried forward. If your gains are likely to be in excess of the annual allowance, consider a pre-sale gift to your spouse or civil partner who is entitled to their own annual allowance. Inter-spouse gifts are tax free.

If you are looking to give to the next generation, remember that gifts totalling up to £3,000 in a tax year are exempt from inheritance tax (IHT). This allowance can also be carried forward by a year, so if you made no gifts to use the exemption in 2010/11 you can make IHT-free gifts of up to £6,000 before 6 April 2012. This system will help you to distribute your estate in the way that you want.

PENSIONS
Steve Latto, head of pensions,
Alliance Trust Savings

ANOTHER budget has come and gone and the usual rumours about the government changing pensions for the worse were unfounded. Indeed, for the first time in a number of years, there were no significant changes announced that effect tax efficient products. However, with the tax year-end fast approaching, individuals do not have much time to review their personal tax affairs in order to take advantage of the opportunities.

With tax relief on individual pension contributions remaining available at an individual’s marginal rate, a gross contribution of £50,000 will cost a 50 per cent taxpayer only £25,000 (40 per cent taxpayers, £30,000). The story becomes more compelling if you have not contributed up to the £50,000 annual allowance in each of the three previous tax years. The government’s carry forward provisions allow you to bring forward any unused allowance you may have, although it will be treated for tax relief purposes as having been made in the current tax year. Also, remember that after 5 April 2012 you lose the ability to carry forward any unused annual allowance from the 2008/09 tax year.

With the announcement in the budget regarding the reduction in the highest income tax rate decreasing from 6 April 2013 to 45 per cent, the 2012/13 tax year will be the last tax year that you will be able to receive 50 per cent tax relief on a pension contribution.

MORTGAGES
Hugh Wade-Jones, director,
Enness Private Clients

THE long Easter weekend is not just the perfect chance to give your house a spring clean, it is also an opportune time to ensure your financial affairs are in order. When it comes to mortgages, many borrowers “set and forget”, in that once they take out a home loan, they neglect to ensure its competitiveness over the course of its term and only begin to think about it again when their broker or lender contacts them to inform them it is up for renewal. This may not be the most cost-effective way of operating, particularly if you are a high net-worth individual making costly repayments. Rather than going to your existing lender – who will only be able to suggest alternatives from their own suite of products – you are better off comparing mortgages from across the market, or enlisting the services of a mortgage broker who should be up to speed with the sharpest rates out there and have access to intermediary-only providers who don’t advertise their wares on the high street.

With lenders changing their criteria continually at the moment and – in the main – becoming more restrictive, if you are looking to change the term of your mortgage or borrow extra funds, it is best to do so as soon as possible. The recent raft of interest-only borrowing reductions to 50 per cent is a key example of this. Borrowers who have just happily sat on their lenders’ standard variable rate (SVR) for the past few years may also want to re-evaluate. With the base rate stuck at a historically low level, many lenders have been happy to leave their SVRs alone. But with the cost of wholesale funding on the rise, rates have started to creep upwards. With margins getting larger on rates by the week, acting quickly is vital.

Finally, with the low yield on savings at present, it can seem almost pointless holding cash at the moment. It may be worth considering switching to an offset or flexible mortgage which will allow you to offset your savings against your mortgage balance and effectively earn net interest at your mortgage rate.

INSURANCE
Peter O’Donnell, chief financial officer, Unum

When was the last time you took a good look at your insurance? Most of us don’t even know what we’re covered for, let alone have the right types of financial protection in place. For example, 1 in 10 people will go on long-term sick leave during our working lives, yet 90 per cent have no financial back-up plan to protect them if this happens.

Protecting yourself doesn’t have to mean spending more. Actually, benefits from your employer can offer the best value protection. So it’s well worth considering what your employee benefits package looks like to see if it needs a spring clean.

Most UK employees have life insurance, which provides a tax-free lump sum to an employee’s dependents in the event of them dying. If you don’t have dependents but do have life insurance, it’s worth considering whether you need it.

What most people don’t realise, however, is that you’re three times more likely to go on long-term sick leave than die during your working life – yet the majority of UK employees aren’t covered for this eventuality. Income protection provides a regular income – up to 80 per cent of your salary – should you become unable to work due to illness or injury. So you can still meet your financial commitments if you’re off sick, allowing you to maintain the lifestyle that you’re used to.

Another popular employee benefit is critical illness insurance, providing a tax-free, lump-sum payment which kicks-in if you become seriously ill or permanently disabled. This can help to ease some of the immediate financial pressure if you’re unable to work, or to help pay for treatment and care.

You needn’t be worried about broaching the topic of the protection offered by your employer – recent research showed 45 per cent of employers who’ve introduced a new employee benefit in the last 12 months were influenced to do so by their staff. So take a look at your benefits package and make sure you’re fully protected.